Budget warnings were 'overruled' by ministers

The Department of Finance provided repeated warnings to the Ahern governments about the risks involved in running pro-cyclical budgetary policy during the boom years, a report published today revealed.

However the report, drafted by a team commissioned to investigate the department's performance over the past 10 years, criticised it for not altering the tone of its warnings as they were ignored in successive budgets.

The report said the department also warned about the dangers of an overheated construction sector. "The department's assessments of the risks from the Irish housing bubble were at least as strong as any public analysis over the period," it said. However the department did not organise a strategic response to the problem, the report found.

The report said the department did not identify the broad risk to the tax system that arose from the very active tax agenda of the Government in the period since 1999.

Tax promises contained in the 2002 Fianna Fail/Progressive Democrat Programme for Government were "effective political messages for the electorate but not good tax policy".

Even though the tax policies were government policy an analysis of the risks involved "should have been provided and communicated forcefully to the Minister for Finance and the Government".

A failure by the department to pay sufficient attention to the broader macro-economic risks for Ireland during the period may in part have been due to a shortage of highly-trained economists and financial market experts on the department's staff.

The authors of the report analysed the annual June memoranda on budget strategy for the Government and found they provided clear warnings of the risks of the pro-cyclical fiscal policies being pursued. The memos were signed by the Minister for Finance of the day and submitted to cabinet. However almost without exception the size of the spending and tax relief introduced by the subsequent budgets was "very substantially above" that advocated by the department.

The report found there were three key reasons for the failure of fiscal policy. One was the pressures created by the economic growth of the period and the fact that Ireland was viewed as a role model.

Also the Government's budget process was "completely overwhelmed" by the programmes for government and the partnership deals agreed during the period. Lastly, the department failed to alter the tone and urgency of its warnings "after a few years of fiscal complacency".

The report found that little emphasis was placed on public sector reform during the period but that the Croke Park agreement now in place provides an "extraordinary opportunity" to modernise the capacity of the service.

The authors did not agree that the department is not "fit for purpose". Among the recommendations contained in the report is that the budgetary process be changed so that forecasts and risk assessments by the department are published and that it employ more economists and other specialists trained to masters level or higher. On public sector reform it recommends the creation of a private sector advisory board and a full-time task force be established to oversee its implementation.

The report was written by Rob Wright, a former Canadian secretary general of finance, Hans Borstlap, a former director general of the Dutch ministry for social affairs and employment, and John Malone, a former secretary general of the Dept of Agriculture and Food. The group was assisted by economist Dr Pat McArdle.

Commenting on the report Fine Gael leader Enda Kenny said: "I think this is something we warned about over a period...Clearly it appears as if there were some warning signals there, but they were not heeded."

He said the foundation for the proper running of the national finances was absolutely critical, adding the report was on his desk and that he expected to go through it this afternoon.